\[\begin{array} { l r } \text { Sales } ( 30,000 \text { units } ) & \$ 150,000 \\ \text { Variable costs } & \underline { 100,800 } \\ \text { Contribution margin } & 49,200 \\ \text { Fixed manufacturing costs } & \underline { 24,000 } \\ \text { Operating Income } & 25,200 \\ \text { Interest } & \underline { 18,000 } \\ \text { Earnings Before Taxes } & 7,200 \\ \text { Taxes } ( 30 \% ) & \underline { 2,160 } \\ \text { Net Income } & \underline { \$ 5,040 } \\ \text { Shares Outstanding } & 600 \end{array}\] -The Degree of Combined Leverage (DCL)is:

A) 3.08x. B) 5.45x. C) 2.73x. D) 6.83x. A) 3.08x. B) 5.45x. C) 2.73x. D) 6.83x.

\[\begin{array} { l r } \text { Sales } ( 100,000 \text { units) } & \$ 1,000,000 \\ \text { Variable costs } & \underline { 300,000 } \\ \text { Contribution margin } & 700,000 \\ \text { Fixed manufacturing costs } & \underline { 250,000 } \\ \text { Operating income } & 450,000 \\ \text { Interest } & \underline { 60,000 } \\ \text { Earnings before taxes } & 390,000 \\ \text { Taxes (at } 31 \% \text { ) } & \underline { 120,900 } \\ \text { Net Income } & \underline { \$ 269,100 } \\ \text { Shares outstanding } & 10,000 \end{array}\] -The Degree of Financial Leverage is:

A) 1.56x. B) 1.79x. C) 7.50x. D) 1.15x. A) 1.56x. B) 1.79x. C) 7.50x. D) 1.15x.

\[\begin{array} { l r } \text { Sales } ( 30,000 \text { units } ) & \$ 150,000 \\ \text { Variable costs } & \underline { 100,800 } \\ \text { Contribution margin } & 49,200 \\ \text { Fixed manufacturing costs } & \underline { 24,000 } \\ \text { Operating Income } & 25,200 \\ \text { Interest } & \underline { 18,000 } \\ \text { Earnings Before Taxes } & 7,200 \\ \text { Taxes } ( 30 \% ) & \underline { 2,160 } \\ \text { Net Income } & \underline { \$ 5,040 } \\ \text { Shares Outstanding } & 600 \end{array}\] -The Degree of Operating Leverage (DOL)is:

A) 1.58x. B) 1.95x. C) 3.50x. D) 1.40x. A) 1.58x. B) 1.95x. C) 3.50x. D) 1.40x.

\[\begin{array} { l r } \text { Sales } ( 30,000 \text { units } ) & \$ 150,000 \\ \text { Variable costs } & \underline { 100,800 } \\ \text { Contribution margin } & 49,200 \\ \text { Fixed manufacturing costs } & \underline { 24,000 } \\ \text { Operating Income } & 25,200 \\ \text { Interest } & \underline { 18,000 } \\ \text { Earnings Before Taxes } & 7,200 \\ \text { Taxes } ( 30 \% ) & \underline { 2,160 } \\ \text { Net Income } & \underline { \$ 5,040 } \\ \text { Shares Outstanding } & 600 \end{array}\] -This firm's break-even point is:

A) 4,800 units. B) 14,634 units. C) 7,142 units. D) 18,000 units. A) 4,800 units. B) 14,634 units. C) 7,142 units. D) 18,000 units.

Exam 5: Operating and Financial Leverage

Sales (30,000 units ) \ 150,000 Variable costs Contribution margin 49,200 Fixed manufacturing costs Operating Income 25,200 Interest Earnings Before Taxes 7,200 Taxes (30\%) Net Income Shares Outstanding 600 -The Degree of Combined Leverage (DCL)is:

(Multiple Choice)

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Question 21

The degree of financial leverage is not influenced by the interest rate on debt,only the amount borrowed.

(True/False)

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Question 22

At the break-even point,a firm's profits are:

(Multiple Choice)

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Question 23

A conservative financing plan involves:

(Multiple Choice)

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Question 24

Financial leverage primarily affects the left-hand side of the balance sheet.

(True/False)

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Question 25

A highly automated plant would generally have:

(Multiple Choice)

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Question 26

Firms with cyclical sales should employ a high degree of leverage.

(True/False)

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Question 27

Jim Wilson is considering the possibility of opening his own machine shop.He expects first-year sales to be $600,000,and he feels that his variable costs will be approximately 50% of sales.His fixed costs in the first year will be $250,000. Jim is considering two ways of financing the firm: (a)60% equity financing and 40% debt at 14%,or (b)100% equity financing.He can sell common stock to his relatives for $10 per share.Either way,he will need to raise $800,000. A)Compute his break-even point in dollars. B)Calculate the Degree of Operating Leverage at the expected first-year sales volume. C)Calculate the Degree of Financial Leverage and the Degree of Combined Leverage under each of the possible financing plans. D)Explain the implications of your answers if the machine shop business is highly cyclical.

(Essay)

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Question 28

If a firm has a break-even point of 20,000 units and the contribution margin on the firm's single product is $3.00 per unit and fixed costs are $60,000,what will the firm's net income be at sales of 30,000 units?

(Multiple Choice)

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Question 29

A firm would be indifferent between financing plans when:

(Multiple Choice)

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Question 30

If fixed costs decreases while other variables stay constant:

(Multiple Choice)

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Question 31

If a firm has fixed costs of $20,000,variable cost per unit of $0.50,and a break-even point of 5,000 units,the price is:

(Multiple Choice)

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Question 32

Linear break-even analysis assumes that costs are linear functions of volume.

(True/False)

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Question 33

Heister Corporation produces class rings to sell to college and high school students.These rings sell for $75 each,and cost $35 each to produce.Heister has fixed costs of $50,000. A)Calculate Heister's break-even point. B)How much profit (loss)will Heister have if it sells 1,000 rings? 8,000 rings? C)Heister's president,J.R.D'Angelo,expects an annual profit of $100,000.How many rings must be sold to attain this profit?

(Essay)

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Question 34

Sales (100,000 units) \ 1,000,000 Variable costs Contribution margin 700,000 Fixed manufacturing costs Operating income 450,000 Interest Earnings before taxes 390,000 Taxes (at 31\% ) Net Income Shares outstanding 10,000 -The Degree of Financial Leverage is:

(Multiple Choice)

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Question 35

Sales (30,000 units ) \ 150,000 Variable costs Contribution margin 49,200 Fixed manufacturing costs Operating Income 25,200 Interest Earnings Before Taxes 7,200 Taxes (30\%) Net Income Shares Outstanding 600 -The Degree of Operating Leverage (DOL)is:

(Multiple Choice)

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Question 36

Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?

(Multiple Choice)

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Question 37

Sales (30,000 units ) \ 150,000 Variable costs Contribution margin 49,200 Fixed manufacturing costs Operating Income 25,200 Interest Earnings Before Taxes 7,200 Taxes (30\%) Net Income Shares Outstanding 600 -This firm's break-even point is:

(Multiple Choice)

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Question 38

As the contribution margin rises,the break-even point goes down.

(True/False)

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Question 39

Which of the following questions does break-even analysis not attempt to address?

(Multiple Choice)

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Question 40

Sales (30,000 units ) \ 150,000 Variable costs Contribution margin 49,200 Fixed manufacturing costs Operating Income 25,200 Interest Earnings Before Taxes 7,200 Taxes (30\%) Net Income Shares Outstanding 600 -The Degree of Combined Leverage (DCL)is:

The degree of financial leverage is not influenced by the interest rate on debt,only the amount borrowed.

At the break-even point,a firm's profits are:

A conservative financing plan involves:

Financial leverage primarily affects the left-hand side of the balance sheet.

A highly automated plant would generally have:

Firms with cyclical sales should employ a high degree of leverage.

If a firm has a break-even point of 20,000 units and the contribution margin on the firm's single product is $3.00 per unit and fixed costs are $60,000,what will the firm's net income be at sales of 30,000 units?

A firm would be indifferent between financing plans when:

If fixed costs decreases while other variables stay constant:

If a firm has fixed costs of $20,000,variable cost per unit of $0.50,and a break-even point of 5,000 units,the price is:

Linear break-even analysis assumes that costs are linear functions of volume.

Sales (100,000 units) \ 1,000,000 Variable costs Contribution margin 700,000 Fixed manufacturing costs Operating income 450,000 Interest Earnings before taxes 390,000 Taxes (at 31\% ) Net Income Shares outstanding 10,000 -The Degree of Financial Leverage is:

Sales (30,000 units ) \ 150,000 Variable costs Contribution margin 49,200 Fixed manufacturing costs Operating Income 25,200 Interest Earnings Before Taxes 7,200 Taxes (30\%) Net Income Shares Outstanding 600 -The Degree of Operating Leverage (DOL)is:

Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?

Sales (30,000 units ) \ 150,000 Variable costs Contribution margin 49,200 Fixed manufacturing costs Operating Income 25,200 Interest Earnings Before Taxes 7,200 Taxes (30\%) Net Income Shares Outstanding 600 -This firm's break-even point is:

As the contribution margin rises,the break-even point goes down.

Which of the following questions does break-even analysis not attempt to address?

The Goals and Activities of Financial Management

Review of Accounting

Financial Analysis

Financial Forecasting

Working Capital and the Financing Decision

Current Asset Management

Sources of Short-Term Financing

The Time Value of Money

Valuation and Rates of Return

Cost of Capital

The Capital Budgeting Decision

Risk and Capital Budgeting

Capital Markets

Investment Banking: Public and Private Placement

Long-Term Debt and Lease Financing

Common and Preferred Stock Financing

Dividend Policy and Retained Earnings

Convertibles, Warrants and Derivatives

External Growth Through Mergers

International Financial Management

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